On 1 October 2023, a two-year transitional period began for implementation of Regulation (EU) 2023/956, which introduces the Carbon Border Adjustment Mechanism (CBAM). CBAM levies punitive CO2 charges against third-country importers of certain goods and only permits CBAM declarants to import these goods into the EU. Although reporting obligations have been imposed for the two-year transition period, CBAM does not fully go into effect until 1 January 2026. For more details, follow this link to the main article.
A. General Information
From 1 January 2026, importers of specific goods from third countries will be required to pay punitive CO2 charges under the Regulation (EU) 2023/956. Consequently, only authorised Carbon Border Adjustment Mechanism (CBAM) declarants will be allowed to import those goods into the EU. A two-year transitional period began on 1 October 2023, during which quarterly reporting obligations were imposed.
B. Obligations under CBAM
I Subject matter
The Regulation applies to the goods listed in Annexes I and II that originate from third countries – those countries that already take part in the European Emission Trade System (EU ETS), such as Iceland, Liechtenstein, Norway and Switzerland. Goods within the scope of the Regulation include basic products (e.g. cement, fertilisers, iron, steel, aluminum, electricity, and hydrogen) and goods that are fabricated from the above, even including screws, wires and similar items. The products covered by the Regulation are also registered under the Combined Nomenclature set out in Regulation (EEC) No 2658/87 and can be identified per their CN-code that is included in the listings in Annexes I and II. The Regulation does not apply to goods below the threshold of EUR 150 and goods transported or used in the course of military activities.
2. Embedded emissions
According to Art. 3 No 22 of the Regulation, all embedded emissions, direct and indirect, are considered. This includes greenhouse gases such as carbon dioxide, nitrous oxide and perfluorinated hydrocarbons (PFCs). Direct emissions are generated in the manufacturing process, and indirect emissions are caused by generated electricity consumed during the production of goods. For goods listed in Annex II of the Regulation, only direct emissions are of consequence.
II Transition period
Special reporting obligations apply during the period 1 October 2023 to 31 December 2025. In particular, the reporting obligation set down in Art. 35 must be observed. In addition, applications for admission as authorised CBAM declarant open. During the transition period, the obligation to pay compensation is not yet effective.
1. Reporting obligations during the transition period
In order to be included in the CBAM registry and to obtain a CBAM account number in accordance with Art. 14 and Art. 16 of the Regulation, it is crucial to comply with the reporting obligations throughout the transition period.
The CBAM report must be submitted one month after the end of each quarter in accordance with Art. 35 of the Regulation. The first report for the fourth quarter of 2023 must be submitted by 31 January 2024, and the last report for the fourth quarter of 2025 by 31 January 2026. If the importer is not established in a Member State, the reporting obligation is carried out by the indirect customs representative. Importers establishes in the Member State may designate an indirect customs representative.
The report must include the quantity of each type of goods with the respective CN code, the total embedded emissions (tonnes of CO2) and the carbon price paid in the country of origin.
2. Application for authorisation as a CBAM declarant
Any market player established in a Member State must apply to obtain the status of authorised CBAM declarant in order to enable the import of affected goods after 1 January 2026. Applications are open starting 31 December 2024. The application is to be submitted by the importer when established in a Member State. In any other situation, the application must be submitted by the indirect customs representative. Following the submission via the CBAM registry, the competent authority in the respective Member State will grant approval.
III Post-transitional obligations
From 1 January 2026, the regulation will apply in full. After having been authorised as CBAM declarant, the declarant is obliged to purchase a number of CBAM certificates according to his needs and to submit a CBAM declaration annually.
1. Annual CBAM declaration
From 2026 onwards, each CBAM declarant is required to file a CBAM declaration by May 31 of the year following the business activities in accordance with Art. 6 of the Regulation. Consequently, the first declaration for the year 2026 must be submitted by 31 May 2027. The declaration must contain the information in Art. 6 (2), regarding the quantity of the imported goods and the embedded emissions that have been set free during production. In addition, the company should indicate whether CO2 charges have already been levied in the country of origin.
In order to secure CBAM compliance, it is crucial to define internal responsibilities for the collection of data, monitoring of obligations under the Regulation, and the compilation of CBAM reports. Furthermore, it is commendable to reach out to third party suppliers as early as possible since their cooperation is of vital importance regarding the calculation of CO2 emissions.
2. CBAM certificates
The CBAM declarant is obliged to purchase CBAM certificates via a centralised platform. The Commission calculates the price according to the average closing prices of EU ETS allowances on the auction platform for each calendar week, which aligns beautifully with the Regulation’s purpose to equalise the costs of production both in and outside of the EU. A CO2 certificate on the European Primary Market costs about EUR 89.
In the year following the purchase of both goods and CBAM certificates, the declarant must declare the exact quantity of imported goods and the emissions that were set free. Corresponding to each ton of embedded emission, it surrenders a CBAM certificate to the Commission. The declarant is obliged to ensure that the required number of CBAM certificates is available on its account in the CBAM registry. Surrendered CBAM certificates will be removed from the registry. Any certificates bought in excess may be repurchased by the Commission upon request. If, however, repurchase is not requested before 1 July of the year following the annual CBAM declaration, the CBAM certificates will be cancelled without any compensation.
In order to avoid double charging, reductions can be claimed in the CBAM declaration as per Art. 9 of the Regulation. In this case, the CBAM declarant should disclose the actual CO2 charges paid in compensation for emissions in the country of origin. It must be able to prove these compensation payments and have them certified by an independent authority of the country of origin, providing name and contact details of the acting authority. The evidence must be kept until the end of the fourth year following the CBAM declaration.
IV Calculation of embedded emissions
The calculation of the quantity of embedded emissions (CO2 per tonne) is to be carried out by means of the method in Annex IV of the Regulation. The calculation will be based either on the material flows based on data from measurement systems and laboratory analyses or on data that stems from continuous measurement of the relevant greenhouse gases. For the calculation, the declarants must be supported by specialised IT tools that provide instructions and training.
Until 31 July 2024, declarants have the option to choose a different mode of calculation than the one provided if the necessary information is not available or if other calculation methods yield comparable and comprehensive values.
C. Further need for regulation
The Commission plans to review the system during the transitional period and will submit a report to the European Parliament and the Council by 2025 with proposals for possible amendments. Further implementing acts on the rules and requirements for reporting and the methodology for calculating indirect emissions will follow.
Furthermore, the scope of CBAM will be reviewed by 2030 to explore the possibility of extension regarding goods already subject to the EU ETS. The scope may be extended to other products and sectors. Companies are advised to review changes and to check whether the Regulation applies to the goods they import.